Mauritius: The Sugar Industry in a Free Market

Published on 2nd October 2018

The Mauritian sugar industry is facing daunting challenges. As virtually all our trade preferences have now been eroded, we are totally exposed to the distorted global prices. This has had a severe impact on our 2017 crop, when the ex-Syndicate price paid to producers fell to a mere Rs 10,717 per ton sugar, which has itself resulted from the steep decline in the world market price, compounded with the abolition of EU production quotas. This is the lowest price level since termination of the EU Sugar Protocol 9 years ago. Producers’ revenue has in fact returned to pre-1995 levels, while local inflation has cumulated to over 120%, hence harshly squeezing them between their sugar proceeds and their ever-increasing operational costs.

Although the industry had prepared itself to operate without safety net, with substantial restructuring having been undertaken before the end of the Sugar Protocol, the goal post unfortunately keeps changing. In fact, the sea change in the Mauritius Sugar Syndicate’s marketing strategy at that time, which called for the conversion of the country’s total production into direct consumption sugars, has served its purpose while the EU was a managed market. But, after abolition of production quotas in October 2017, which has resulted in a significant supply surplus in this market, it is now much less predictable.

Distorted sugar prices

Notwithstanding the extensive market diversification undertaken over the last few years, with less than 50% of our sugar exports being presently delivered to the EU, the real challenge remains the realization of remunerative prices. The world market price for sugar is not only cyclical but often turns out to be highly distorted, especially when supplies are in excess, hence falling below average production cost levels.

Global sugar prices can become distorted. Firstly, 70% of the world’s production are consumed locally, and domestic sales therefore constitute the greater part of the producers’ revenue. As their local prices are usually protected from imports through tariff and non-tariff barriers, they can afford exporting any excess at lower prices.

In the case of Mauritius, the local market unfortunately represents only 10% of its production. We have nonetheless the import tariff on sugar recently raised to 80%, a measure which will no doubt help recover our market share and secure a viable return for at least these quantities.

If the Syndicate supplies the whole market requirement, this will represent a net income of some Rs 300 million, over and above the revenue obtainable if the equivalent tonnage were exported under prevailing conditions. We should, however, now ensure that we remain sheltered from competitors enjoying preferential access into Mauritius.

The second source of price distortion derives from the support provided to producers by their respective governments to ascertain their economic viability, irrespective of selling prices. The sugar industry often lies high in their priority, given its importance for job creation, poverty alleviation, food security, energy production, environment protection, carbon credit rating. In addition to cross-subsidies, financial assistance can be provided in different forms such as fixed cane payment in India, Voluntary Couple Support in EU, export subsidies in Pakistan, ethanol framework in Brazil, or even domestic price controls or currency exchange management.

Although the strength of Mauritius lies in the production of value-added sugars, such as special sugars, which attract higher prices, they remain concentrated in niche markets. Current export demand would not suffice to replace the industry’s total production. Besides, the prices obtainable are also under increasing pressure with the emergence of new suppliers, as all sugar producers are on the look-out for better sales opportunities.

What our industry needs are export prices which are protected from world market price distortion and volatility. This can be obtained only in countries which themselves have secured domestic price levels, but where our own sugars could enjoy preferential access. This can be achieved under free trade agreements negotiated by Mauritius but is subject to the trading partners’ willingness to provide such access, and can unfortunately be a lengthy process.

Meanwhile further structural reforms are urgently required to allow the industry to compete in a free market. Mauritian producers should be assured of viable revenues, and with the required visibility, so as to firstly avoid further land abandonment and secondly encourage investment in better cultural practices, hence improvement in cane productivity. The acreage under cane cultivation, estimated at some 48,000 ha for the 2018 crop, is already at a critical level, and Structural reforms are urgently required to allow the industry to compete in a free market.

It is feared that the industry’s competitiveness can be further affected if this decline persists. We should maintain at least 50,000 ha of land under cane if we want to ascertain a sustainable industry. Recent government measures should bring much relief to producers for the 2018 crop, and hopefully curtail further land abandonment this year. These will bring an additional payment of Rs 1,250 per ton sugar for all producers, while planters will reap a further remuneration equivalent to Rs 1,250 per ton sugar for their bagasse. Government has, moreover, responded positively to small growers’ appeal for an improved cash flow, by providing 80% advance payment on their cane co-products, in addition to their sugar price, and even advance payments for the purchase of fertilizers. The latter measure goes in the right direction towards the increase in their competitiveness.

Nevertheless the structural reforms requested by different categories of producers should still be pursued as, without such bold measures, we fear that the industry could face financial hardship again in the foreseeable future. We should not forget that sugar sales revenue will continue to fluctuate in a free market environment.

The Syndicate, on its side, in light of the financial hardship faced by its members for the 2017 crop, while keeping in mind the cyclical nature of global sugar prices, ventured to contract a 5-year term loan of some Rs 300 million with the Sugar Insurance Fund Board to top-up their revenue for this year. Besides, it had to commit to another loan of Rs 215 million to top up its sales revenue as the ex-Syndicate price, initially estimated at Rs 13,500, decreased during the year with the continuous decline in selling prices, while the cumulative advance payments to small planters had meanwhile reached higher levels.

This incident has in fact been a wake-up call for a review of the methodology followed to-date for the estimation of the price payable to producers and advances paid at the start of the harvest, bearing in mind the risk of forecasted prices declining during the year. The total payment received by producers for the 2017 crop in connection with their sugar production, i.e. excluding molasses and bagasse, thus attained Rs 13,417 per ton sugar, but still significantly lower than the previous year's revenue of Rs 15,571.

A new global surplus cycle

To explain why sugar prices have been affected so badly, it is necessary to understand the new market environment in which the Syndicate is having to sell its sugars. An oversupplied sugar market in the EU, which has been our main destination till late, was anticipated, in fact since abolition of production quotas was decided 4 years earlier. This was confirmed when producers announced a substantial increase in area under beet, which finally rose by 17% for their 2017 crop. However, what was not foreseen was the free fall in world sugar prices as from early 2017.

What triggered such a sharp decline in prices? In fact, a new global surplus cycle kicked in 2017-18 as the crop outturn in several countries attained levels well beyond expectation, mainly on account of favourable weather conditions. Hence, in addition to the EU crop which reached almost 21 million tons, Thailand had a record crop of 14 million tons, and India 32 million tons.

These 3 producers alone have brought in an extra 20 million tons sugar, while global consumption meanwhile grew by only 3 million tons. A slowdown in the annual world consumption growth has in fact been noted recently, seemingly on account of the 'anti-sugar' campaigns against obesity.

As the production estimates kept rising during the year, sugar prices continued to recede. Hence the New York #11 futures price of raw sugar, which had reached US 22 cts/lb in January 2017, fell by some 40% by June 2017. Weak oil prices and the depreciating Brazilian Real over the same period, were not supportive of sugar prices. Nor were the trade support measures adopted by certain countries to ascertain stable revenue for their producers. As a result, non-trade investors, in anticipation of the price fall, went short on their positions, which exacerbated the price decline. There was further loss in interest in the commodity as a second year of significant global surplus was foreseen for 2018/19: according to preliminary figures, it could attain 7 million tons and we can therefore expect another year of depressed prices in 2018/19.

EU sugar prices have been directly impacted by the global price fall, in fact even worse given that, in light of the significant increase in supplies after abolition of production quotas, buyers have been in no rush to finalise their purchase but have continued to search for lower prices. The production outturn of 20.9 million tons for the 2017 crop was in fact the highest level reached over the last 20 years. While the EU producers’ plan was to ensure market balance and export their surplus to reduce price pressure, they were caught short by the steep fall in the global sugar price during the first half of 2017. As a result, less sugar was exported and they consequently faced the challenge to dispose of their surplus supplies. Against such pressure, they have been compelled to further reduce their prices during the year.

As for the Syndicate’s own sales, a significant decrease in white sugar exports was anticipated with the advent of the increase in EU production. A number of its regular customers were reluctant to commit to imports, while those with whom contracts had been negotiated at the start of the campaign kept revising their price offers downwards.

As the forecasted prices fell further, additional quantities had to be deviated to other destinations. Finally, just over 108,000 tons of white sugar from the 2017 crop were delivered to the EU market, compared with 316,000 tons in the preceding crop. It should be noted that price levels at the start of the campaign were already 15% below the average price for the previous year, and they dwindled to almost 30% by the end of the year. These prices are expected to shrink further in the following marketing year, as the EU production surplus could attain another 3 million tons.

As for sales of special sugars, there was already pressure in the EU at the start of the 2017 crop for a reduction in prices with the decline in the price of white sugar. As competition intensified, especially from new suppliers of direct consumption raw sugar, value was further eroded. It is feared that such price trend could entail the ‘commoditisation’ of these value-added products, especially as quality norms are often not being adhered to.

The United States are probably one of the rare markets which has preserved preferential prices in a volatile global environment, as it remains a managed market. Supplies, both domestic and from imports, are controlled under the US Sugar Program and market balance is adequately monitored. Our US TRQ is presently being filled with the supply of Special Sugars.

The African market as the obvious choice

The African market is becoming increasingly important for the Mauritius Sugar Syndicate. It is the obvious choice given its proximity to Mauritius and its large deficit. Sub-Saharan Africa imports over 3.5 million tons sugar annually while the whole continent requires over 8 million tons.

Already for the 2017 crop, 138,000 tons of sugar, both raw and white, have been shipped from Mauritius to this region. The regrouping of several Eastern and Southern African countries under COMESA and SADC provides impetus for the fostering of intra-regional trade, and this should extend to the whole continent in the wake of the Continental Free Trade Area.

However, in practice, given the sensitivity of sugar among the producers, they tend to protect their markets from imports, either through tariff or non-tariff barriers, despite provisions of the trade agreements. Hence sugar supply into South Africa is at present restricted under a derogation of the SADC Trade Protocol to a mere 2,700 tons per annum. Likewise, Kenya has been allocated a Sugar Safeguard under COMESA, presently restricting duty-free supplies from Mauritius to only 42,000 tons annually. Other countries like Angola, Tanzania or Democratic Republic of Congo, irrespective of their meaningful deficits, simply have negligible duty on their sugar imports, hence providing no margin of preference for regional suppliers compared with the world’s largest exporters.

The African market is becoming increasingly important for Mauritius. The trade policies of the Mauritian government are to ensure that the regional market provides a comfortable margin of preference for Mauritius sugars. In the same vein, sugar has been included in the Mauritius Wish list in the negotiation for bilateral free trade agreements with India and China; already the Chinese authorities have granted a reduced tariff rate quota for Mauritian special sugars, to attain 50,000 tons over a transition period, a first in their trade diplomacy.

Securing market access, especially in such countries with protected sugar price levels, provides a safeguard from the world price distortion and volatility. Pending these agreements are adequately implemented, the Syndicate is having to sell sugar in a virtually free market environment, hence the revenue shortfall being faced presently. The loss has been exacerbated for the 2017 crop by the strengthening Rupee v/s the US Dollar while our exposure in this currency has increased with the diversification of our export market base.

Competitiveness remains key, hence the urgency to increase efficiency along the whole supply chain. On its side, the Syndicate is leaving no stone unturned to be able to tap the best opportunities under prevailing market conditions: that includes a continuous review of its product mix and its marketing strategy.

In addition to the versatility required on the marketing front, the industry is regularly adapting to the increasing demand of buyers with respect to quality and conformity with food safety standards. Mauritius already has a strong reputation in this regard, but the priority is to stay ahead of the competition. A noteworthy increase in demand for Bio sugars together with the attractive price levels that can be reaped, have renewed interest within the industry to work towards the certification of its sugars.

The market, moreover, requires suppliers to produce in a sustainable manner, in line with the UN’s Millennium and Sustainable Development Goals. While a number of small growers’ cooperatives have been certified with the Fair trade standards over the last 10 years, the industry at large has now embarked on a programme to demonstrate its conformance with sustainability standards. This will be an essential differentiating factor in a free market environment.

Last but not least, we have to ensure a judicious management of producers’ sales proceeds, even more essential when market conditions are less predictable. That includes not only a rigorous control of operational expenses and financial charges, but also an adequate management of the foreign exchange proceeds to mitigate exchange rate fluctuations and maximize producers’ revenue.

All sugar exporters, including those in the EU, are currently incurring heavy losses. These prices cannot last forever and will certainly improve. Nonetheless, considering the cyclical nature of sugar supply and demand, hence global prices, the price fall will occur again and again! The Structural Reform of the industry is therefore a sine qua non to ensure cane sugar production remains sustainable in Mauritius.

The contribution of the sugar cane industry to the Mauritian economy, even today, cannot be underestimated: it concerns not only the export of sugar, which still represents 16% of the country’s export revenue, but also other sectors directly depending on this sector, such as power generation, distilleries, transport, and other support services; and even those indirectly benefiting from its presence such as tourism, thanks to the lush-green cane fields and turquoise lagoons well-preserved from soil erosion. No doubt, this benefits the population at large, and we cannot afford to do away with it. With the concerted effort of all stakeholders, the sugar industry will yet again rise to the challenges it is presently facing, as it has always done in the past.

By Devesh Dukhira and Heymant Sonoo

The authors are respectively the Chief Executive Officer and the vice-President of the Mauritius Sugar Syndicate.